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The bizarre US housing market

Good morning! Melbourne avoided a lockdown – for now – after the six new cases reported yesterday were all close contacts or family members of existing cases.

There are now at least 15 active cases of COVID-19 in Victoria linked to the South Australian hotel quarantine leak. A reminder that:

  • this is now the 17th outbreak from hotel quarantine in the past six months;
  • the Australian constitution (s51.ix) clearly states that "quarantine" is the responsibility of the Commonwealth Parliament; and
  • back in October 2020, the Commonwealth's own health department recommended it develop "options for new models of quarantine", and "consider a national facility for quarantine to be used for emergency situations, emergency evacuations or urgent scalability".

At the current rate we're on track for another dozen or so hotel quarantine-related outbreaks before every Australian adult has even had the choice to get vaccinated. 🤦‍♂️

Markets

Daily % change

AUD/USD

77.4

-0.1%

10Y Bond

1.63

-0.8%

ASX200

7,093

-0.3%

Brent (bbl)

68.8

0.1%

Gold (oz)

1,897

-0.2%

Iron ore (t)

172.4

-6.3%

Bitcoin

38,675

2.7%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

The US S&P500 (+0.19%) closed up slightly on the back of comments from a couple of Fed officials that it's "way too early" to tighten policy and recent pricing pressure has been "traced to transitory elements".

More houses: Preliminary ABS data for the March quarter showed the value of Australian construction work done increased by 2.4% since the December quarter 2020. Building work done was up 2.5%, with solid growth in renovations (+11.3%) and new home building (+4.1%), no doubt helped along by all of the recent stimulus.

Kiwi hawks: The Reserve Bank of New Zealand left its cash rate unchanged at 0.25% yesterday but said it expects to increase the cash rate by September 2022, reaching 1.5% by the end of 2023. The kiwi dollar jumped over 1% on the hawkish (these days!) announcement.

Digging holes: US President Joe Biden is apparently focused on "creating jobs that process minerals domestically into electric vehicle battery parts", rather than "permitting more US mines", because "it's not that hard to dig a hole". That means he'll be leaning heavily on hole digging specialists such as Australia for the requisite raw materials.

Iron anvil: The iron ore price fell heavily yesterday and is now down over 20% from its peak just two weeks ago. Rather than being pressured down by China's government (e.g. Bitcoin), a more likely scenario is that iron ore – a key steel-making ingredient – is simply following steel prices, which are down a similar amount over the same period. Could the credit impulse from China's post-coronavirus stimulus be fading already?


Analysis

The bizarre US housing market

The US Case-Shiller house price index has surged.
The US Case-Shiller house price index has surged. FRED

What happens when you create a demand shock (stimulus) after a supply shock (COVID-19)? You get the US housing market. Glenn Kelman, the CEO of real estate brokerage firm Redfin, unleashed a tweet storm yesterday with some data and anecdotes from the ground, including a story of a homebuyer who "included in her written offer a pledge to name her first-born child after the seller. She lost."

Some facts: There are now more realtors than listings. Listings are at record lows due to a collapse in building permits in many cities in 2020 and soaring raw material costs in 2021 ("Lumber prices are up 300%"). It's not the whole story though – prices are also up in places where listings have actually increased, such as New York (+28%) and San Francisco (+77%), suggesting rising demand is playing a larger role than a lack of supply.

Desperate times: 63% of potential buyers reported having bid on a home they hadn't even seen in person. One reason for that is because many people are moving to the regions or to new states entirely – 67% of those surveyed who moved got a house the same size or bigger but spent the same or less on housing. Of those who upgraded, 78% reported having the same or more disposable income after the move ("Idaho home prices could triple and still seem affordable to a Californian").

The pandemic's legacy: People are moving to more affordable places now that working from home has become socially acceptable. "For low-tax states, 4 people move in for every 1 who leaves. For Texas, this ratio is 5:1; for Florida, 7:1." Banks are even calling employers to make sure borrowers will be allowed to work from home after the move.

However, this dynamic is also inequitable and could compound social and economic problems in many cities in the future: "90% of people earning $US100,000+ per year expect to be able to work virtually, compared to 10% of those earning $US40,000 or less per year. The folks who need low-cost housing the most have the least flexibility to move."


The Wrap Up

  • Due to the Melbourne coronavirus outbreak, ten Victorian AFL clubs have been ordered to self-isolate for the next seven days, with players and staff only to leave home for "playing, training and essentials". Saturday night's Hawthorn v Gold Coast game has been cancelled.
  • US President Joe Biden ordered a new investigation into the origins of COVID-19, asking "the Intelligence Community to redouble their efforts to collect and analyse information that could bring us closer to a definitive conclusion, and to report back to me in 90 days".
  • The CEO of Australia's Future Fund, Raphael Arndt, cautioned that "a failure to reduce the stimulus at the appropriate time could fuel a significant increase in inflation, a risk markets are already starting to focus on".
  • Moderna filed documents with ASIC to set up a local company, with the aim of launching commercial operations in Australia. Companies have until 16 July to submit proposals to potentially unlock Commonwealth funding set aside in the budget.
  • 57 days until the Olympics: Japanese newspaper Asahi Shimbun – one of Japan's most influential and an official partner of the Tokyo Olympics – called for the event to be cancelled.
  • Facebook's WhatsApp has sued the Indian government in an attempt to block a new law that would require it to identify the "first originator of information", a move that would effectively break the app's end-to-end encryption.
  • 50% of all American adults have now been fully vaccinated against COVID-19.
  • If you're a cruiser, you're a cruiser: "Hong Kong to launch 'cruises to nowhere' as early as July, with strict Covid-19 rules in place."
  • A Bali bubble? Indonesia's government intends to "make bubbles around islands", with the current plan to open a domestically isolated Bali up to tourists by July 2021.
  • According to former aide Dominic Cummings, last year UK Prime Minister Boris Johnson wanted to go on TV and be infected with the coronavirus to show that "it's just like swine flu, don't worry about it".

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